TD Bank – The Canadian Bank Surfing on US Tailwinds

 

The Company in a Nutshell

• Canadian bank revenues will increase as interest rate goes up.
• TD’s very lean structure plays a great role in its expansion.
• TD has a great presence in the US compared to other Canadian banks.

Business Model

TD is the second largest Canadian bank by market cap and is often playing side-by-side for the 1st position with Royal Bank (RY). TD is the most classic bank in Canada as its business model focuses a lot on retail banking. Its portfolio is well diversified between Canada (61%) and the U.S. (30%). As you can see, TD is mostly active on the US East Coast and shows no presence elsewhere.

source: TD Q3 2018 presentation

Canadian banks are not known for their success past the Southern borders. TD is definitely the model other banks are following in that manner. TD has successfully completed several acquisition on U.S. soil and used in-branch expertise to develop their network. In other to remain competitive, TD is developing its mobile services. To this date, it now shows over 12 million clients using their mobile apps.

Growth Vectors

What we like most about TD bank is how management keeps things clean and simple. As the bulk of their business is generated through classic banking activities such as personal and commercial savings and loans, there are hardly no surprises coming from their financial statements. TD enjoys the best of both worlds. On one side, it is the largest Canadian bank in term of total assets and total deposits. It evolves in a highly regulated oligopoly protecting TD (and its peers) from outsiders. On the other side, it has understood how to grow successfully through the U.S. market. As their economy is flourishing, TD is well-established on the East Coast to Capture this tailwind.

Potential Risks

As Canadian interest rates start rising, American investors may be concerned about currency headwinds. But, in a long-term perspective, the currency effect (one way or another) doesn’t affect much an investment return.

The Canadian housing market has always been a concern since 2012, but TD seems to manage its loan book wisely. There hasn’t bee a correction in the housing market back in 2008-2010 as compared to what happened in the U.S. This is how we find very expensive housing markets among Canadian largest cities such as Toronto, Vancouver, Calgary and Edmonton. A higher insured mortgage level in the prairies seems adequate while TD continues to ride the ever-growing downtown Toronto housing market.

Dividend Growth Perspective

TD is a Canadian dividend aristocrat (which permits a “pause” in the dividend increase streak). Management prefers to increase dividend once a year and did so with a 12% increase earlier this year. You can expect the next raise in early 2019. Shareholders can expect a mid single-digit to double-digit dividend growth going forward.

Final Thoughts

A stronger economy from both countries led to TD’s stronger results. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has a large exposition in major cities like Toronto, Vancouver, Edmonton and Calgary, combined with a strong presence in the US. If you are looking for an investment in a straight forward bank, TD is your pick. This banks is a good example of a perfect dividend triangle.